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Need for Sector-Specific Ease-of-Doing Business Indices

Amit Cowshish is a former Financial Advisor (Acquisition), Ministry of Defence and presently a Distinguished Fellow with the Indian Institute for Defence Studies and Analyses. Click here for Detailed Profile

The ‘Make in India’ initiative of the government is focussed on making India a manufacturing hub by facilitating greater involvement of the private sector. But this objective is not backed in adequate measure by an eco-system conducive to smooth conduct of business by the enterprises. As per the World Bank’s Ease-of-Doing-Business (EoDB) index, conducting businesses in India continues to be a challenge.

In 2015, India ranked 142nd (later revised to 134th) among 189 countries in the EoDB index, prompting the then Minister of State for Finance, Jayant Sinha, to affirm that the government intended to take measures to push India to a slot among the first 30.1 This was reiterated by the CEO of the Niti Ayog in May 2016,2 but by the month of December that year, the target was revised to 50.3

In a federal structure, making such an initiative work requires a very high level of coordination between the centre and the states. Some states have indeed made serious efforts to encourage the manufacturing sector but these efforts have largely been disjointed and have not yielded the intended results. This is evident from the fact that India has inched up only four notches to the130th rank in 2017. Except for the ease of ‘getting electricity’ — which has seen a marked improvement from the 51st rank last year to 26th in 20174, on all other parameters on which the business eco-system is tracked by the World Bank, there is nothing to write home about.

At this pace, the goal of being counted among the first 30, or even top 50, will elude the country for several decades. The economy can ill-afford this, especially with the growth rate being on a downward trajectory and the contribution of the manufacturing sector to the Gross Domestic Product (GDP) continuing to be sedate.5 The objective of increasing the share of the manufacturing sector in the GDP to 25 per cent seems distant at this juncture.

This calls for looking beyond the 10-odd parameters that constitute the EoDB index6 and taking a closer look at the micro factors which affect business operations. This is important, because, purely from the point of ease of doing business, all these 10 parameters do not affect each of the twenty five sectors identified by the government to promote manufacturing in equal measure. It is also possible that some factors that are critical for a particular sector do not even figure among these 10 parameters.

While ‘paying taxes’, for instance, may affect every sector to varying degree, ‘trading across the borders’ may be more important for the information technology (IT)-business process management (BPM) sector than it is for the defence manufacturing sector. Within the defence manufacturing sector, ‘getting credit’ may not affect the big firms as much as it affects the micro, small and medium enterprises (MSMEs). An assurance that successful development of a prototype will be followed by an assured supply order is a critical factor in defence but not necessarily in other sectors. But such aspects are not part of the ten parameters comprising the EoDB index.

Excessive focus on the global EoDB index is perhaps taking the attention away from the need to address such sector-specific micro factors that have a bearing on the ease of doing business in that sector. An obvious case in point is the defence manufacturing sector. Unlike other sectors such as automobile components or wellness, defence is an unpredictable monopsony governed by complex procedures and driven by a large number of players.

The factors that make the defence manufacturing sector somewhat unique require the Ministry of Defence (MoD) to develop a sector-specific index of ease of doing business in consultation with the industry, with interwoven sub-indices focused on the foreign manufacturers, public sector undertakings, big players in the domestic defence manufacturing market and the MSMEs. Quantitative norms will also need to be developed to assess the progress made in respect of each parameter constituting these indices.

Without in any way disparaging the steps taken by the government since the defence manufacturing sector was opened to the private sector in 2001, a large number of problems raised by the industry remain either unaddressed or inadequately addressed. This is exemplified by continued dominance of the defence public sector undertakings in defence manufacturing and a meagre increase in foreign direct investment (FDI) in defence in spite of what the government considers to be progressive liberalisation of the FDI regime over the past three years.

There also continues to be a lack of adequate information about MoD’s shopping list. The qualitative requirements of the equipment, weapon systems and other platforms, drawn up by the services, continue to pose a challenge for the industry. Field trials, staff evaluations and contract negotiations continue to take forever to complete. While new procurements are being regularly approved in principle by the Defence Acquisition Council and other competent authorities, the follow-up action on the approved procurement proposals continues to be tardy.

Despite all the improvements made over the years with a view to promoting indigenous production, the procurement procedure continues to be seen largely as complex and opaque. Addition of a new procurement categories like ‘Buy (Indian Designed, Developed and Manufactured) and adoption of formats like the strategic partnership model seem to have complicated the procedure rather than simplified it. Implementation of the offset policy is an ongoing challenge.

The prescribed contract format is not dynamic enough to accommodate the programme-specific requirements. The prescribed time-frame for completing the procurement process is generally followed only in breach. Even mundane issues like prompt payment to the vendors, which perhaps affects them the most, continues to defy solution. Efficacy of the single-windows and grievance redressal mechanisms, wherever these have been created, often falls below the expectation.

Information required by the vendors in connection with the conduct of their business with the MoD is hard to get. The pace and quality of decision-making does not inspire as much confidence as it should. Procurements have truly become what many describe as a game of snakes and ladders in the absence of a composite and distinct defence procurement policy.7

It is issues like these which continue to militate against the ease of doing business in defence that need to be identified in consultation with those who are expected to push defence manufacturing and create measurable indices to monitor the impact of the government’s efforts to address those issues. Such a bottoms-up approach, not just in defence manufacturing but also in sectors like tourism and hospitality which have a huge untapped potential, could help India climb up the global EoDB index rapidly.

Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.